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March 7, 2024

Bulgaria | CJEU decision looks at VAT refund in case of 'bad' debts

  • Value-added tax (VAT) refunds on bad debts is a hot topic in both international and Bulgaria court practice.
  • As of 2023, Bulgaria introduced a legal framework for bad-debt relief in the local VAT Act, but many questions related to the refund for past periods remain.
  • A recent decision from the Court of Justice of the European Union on a Bulgarian request for a preliminary ruling could open the door for VAT refund opportunities for past periods.

Brief introduction

On 29 February, the Court of Justice of the European Union (CJEU) issued a judgment (2024 CJEU judgment) on a preliminary ruling from Bulgaria regarding the refund of VAT on bad debts incurred before 2023. The CJEU held that a supplier is entitled to reduce the tax base and claim a VAT refund where his debts were not collected, even though he did not issue a credit note and inform his debtor of his intention in advance. Although the factual background of the case is narrow, applicable taxpayers will want to assess whether the CJEU's reasoning in the decision applies to their facts.

The issue of a VAT refund for noncollectible or so-called "bad" debts has been discussed in recent decisions of the CJEU, as well as in the local Bulgarian administrative and court practice. At the beginning of 2023, amendments to the Bulgaria VAT Act of 2006 were adopted, aiming to create a VAT refund procedure for situations in which the recipient of a supply had not collected consideration for that supply. The issue was initiated by an earlier Bulgarian case before the CJEU C-248/18 (2018 CJEU decision).

Development of the issue in recent years

Following the 2018 CJEU decision, VAT refund claims on noncollectible debts in Bulgaria were submitted under the provision set forth in the Tax and Social Security Procedure Code (there was no explicit provision in the law on VAT prior to 2023). In most cases, the tax administration and the national courts declined to refund VAT on various procedural grounds. One requirement was that the supplier must have issued a credit note to the original supply invoice.

Opportunities and next steps

The 2024 CJEU judgment is a significant development on the VAT refund issue. It increases the possibility of a successful refund of VAT on uncollectible debts both in pending tax administration disputes involving this issue and in cases where no VAT refund has been claimed at all.

There is also an opportunity for persons who have been denied a VAT refund by a final court decision because no credit notes had been issued to seek state compensation for damages arising from applying excessive conditions contrary to European Union law.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst and Young Law Partnership Bulgaria, Sofia

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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